The Fed’s Digital Bullets

Every army keeps troops in reserve. If there is a breakthrough in the defensive line by the enemy army, the commanding general needs reserves to send into the breach to keep his army from being routed. It is too risky not to have reserves.

The Federal Reserve System’s reserves are digits. At any time, it can create digital entries on its balance sheet by purchasing assets. This increases the monetary base. The FED used these reserves in October of 2008, when the world’s financial system was poised at the edge of the abyss. It doubled the adjusted monetary base in a short period of time. The chart is here. It is the chart at the top of the page.

I argue that the FED is keeping digits in reserve. It refuses to activate them. These reserves have a strategic function. They are to be used only in the case of a major threat to the financial system – the economic equivalent of a breach in the line.